Yes, we want to know the principal balance as of the beginning of the year. The IRS lets you deduct your mortgage interest, but only if you itemize deductions. You can't deduct the principal (the borrowed money you're paying back). In addition to itemizing, the principal amount of debt can’t exceed $750,000 to get the full deduction. We ask that question because we need to know if the total amount of mortgage debt is over $750K. You confirmed that it is, so we have to calculate the average principal balance during 2023 to figure the portion of your interest that is deductible.
When you enter the interest, the program adds the full amount to deductible interest. But as you go through and provide the details, TurboTax applies the limitation. Since you are using the desktop program, you can click on Forms at the top, and view your Deductible Home Interest Worksheet to see how the deduction limitation is applied.
From IRS Pub 936 - Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). It must also be secured by that home. If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that isn't more than the cost of the home plus substantial improvements qualifies as home acquisition debt.
Home acquisition debt limit.
The total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt on your main home and second home is limited based on when the debt is secured.
For debt secured after December 15, 2017, the limit is $750,000 ($375,000 if married filing separately).
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